restored relatively quickly. The sharp decline in the peso spurred export
sales and economic activity. Inflation was far less a problem than past such
episodes would have suggested. A decade from now, I suspect, economic
historians will conclude that it was the disinflationary forces of globalization
that eased the adjustment.
What I found unusual about this episode was not that Argentine leaders
in 2001 were unable to marshal the fiscal restraint required to hold the
peso-dollar link, but that they had been able for a while to persuade their
population to maintain the degree of restraint that a pegged peso required.
It was clearly a policy aimed at inducing a seminal shift in cultural values
that would restore the international stature Argentina had enjoyed in the
years immediately preceding World War I. But cultural inertia proved, as it
had many times before, too formidable a barrier.
It's not that developed countries, such as the United States, have not
had flirtations with economic populism. However, in my view, it is unlikely
that populist leaders could change the U.S. Constitution or culture to wreak
the devastation of a Peron or a Mugabe. William Jennings Bryan, with his
stirring "Cross of Gold" speech at the 1896 Democratic convention, was, to
me, the most effective voice of economic populism in U.S. history. ("You
shall not press down upon the brow of labor this crown of thorns," he declared.
"You shall not crucify mankind upon a cross of gold.") Yet I doubt
that America would have changed much had he become president.
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THE AGE OF TURBULENCE
I would say the same about Huey Long of Louisiana, whose "share the
wealth" rhetoric in the 1930s won him a governorship and a seat in the U.S.
Senate. His eye was on the White House when he was assassinated in 1935.
Populism, however, is clearly not in the genes. His son Russell, whom I
knew quite well as the longtime chairman of the Senate Finance Committee,
was a staunch supporter of capitalism and business tax breaks.
There have, of course, been numerous episodes of populist policy, but not
governments, throughout American history, from the free-silver movement
of the late nineteenth century to much New Deal legislation. The most recent
was Richard Nixon's ill-fated wage-price freeze of August 1971. But
President Nixon's and earlier populist policy episodes were aberrations in the
economic progress of the United States. Populist policies and governments in
Latin America have been endemic and hence much more consequential.
Economic populism is presumed to be an extension of democracy to
economics. It is not. Small-d democrats support a form of government in
which the majority rules on all public issues, but never in contravention of
the basic rights of individuals. In such societies, the rights of minorities are
protected from the majority. We have chosen to grant to the majority the
right to determine all public policy issues that do not infringe on individual
rights.*
Democracy is a messy process, and it certainly is not always the most
efficient form of government. Yet I agree with Winston Churchill's quip:
"Democracy is the worst form of government except for all those other forms
that have been tried from time to time." For better or worse, we have no
choice but to assume that people acting freely will ultimately make the
right decisions on how to govern themselves. If the majority makes the
wrong decisions, there will be adverse consequences—even, in the end,
civil chaos.
Populism tied to individual rights is what most people call liberal democracy.
"Economic populism" as used by most economists, however, refers
implicitly to a democracy in which the "individual rights" qualifier is largely
*We may require supermajorities to implement certain laws. For example, in the United States,
only a supermajority may override a presidential veto—but it was majorities in the assemblies of
the thirteen original states that ratified the Constitution, choosing to be governed in that manner.
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LATIN AMERICA AND POPULISM
missing. Unqualified democracy where 51 percent of the people can legally
do away with the rights of the remaining 49 percent, leads to tyranny* The
term then becomes pejorative when applied to the likes of Peron, who to
most historians is largely responsible for Argentina's long economic decline
after World War II. Argentina is still laboring under that legacy.
The battle for capitalism is never won. Latin America demonstrates
this perhaps more clearly than any other region. Income concentration and
a landed gentry with roots in sixteenth-century Spanish and Portuguese
conquests still foster deep and festering resentments. Capitalism in Latin
America is still a struggle at best.
*Many of our Founding Fathers feared that American majority rule without the first ten
amendments to the Constitution of the United States of America—our Bill of Rights—would
be tyranny.
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EIGHTEEN
CURRENT ACCOUNTS
AND DEBT
C
C
onsumer short-term debt.. . is approaching a historical turning
point.... It must soon adjust itself to the nation's capacity for going
in hock; which is not limitless/' declared Fortune in March
1956. A month later the magazine added, "The same general observations
apply to mortgage debt—but with double force." Chief economist Sandy
Parker and coauthor Gil Burck arrived at those dour conclusions after por
ing over detailed data on the money owed by U.S. households. (The data
had been assembled by me, working as a Fortune consultant.) Their concern
was hardly unique—many economists and policymakers were worried that
the ratio of household debt to household income had risen to a point where
the American family was in danger of delinquency and default. But the
fears turned out to be misplaced, because assets and household net worth
were rising more rapidly than we knew.
Today, nearly fifty years later, the ratio of household debt to income is
still rising, and critics are still wringing their hands. In fact, I do not recall a
decade free of surges in angst about the mounting debt of households and
businesses. Such fears ignore a fundamental fact of modern life: in a market
economy, rising debt goes hand in hand with progress. To put it more for
CURRENT ACCOUNTS AND DEBT
mally, debt will almost always rise relative to incomes so long as we have an
ever-increasing division of labor and specialization of tasks, increasing productivity
and a consequent rise in both assets and liabilities as a percentage
of income. Thus, a rising ratio of debt to income for households, or of total
nonfinancial debt to GDP, is not in itself a measure of stress.*
This lesson is worth bearing in mind as we turn to a similar concern:
the rise of America's trade deficit and the broader current account deficit.
America's current account deficit has climbed steeply in recent years, from
zero in 1991 to 6.5 percent of GDP by 2006. At the same time, it has gone
from being an arcane footnote in academic journals to headline status
across the globe. It has been on the agenda of virtually every international
economic gathering I've attended in recent years. It is the focus of a worldwide
fear that America's external imbalance—the dramatic gap between
what the nation imports and what it exports—will precipitate both a collapse
of the U.S. dollar's foreign-exchange value and a world financial crisis.
A sliding dollar could become a central focus of policymakers' fears about
the sustainability of globalization, the creator of much of the world's increased
prosperity over the past decades.
The concerns about the U.S. external deficit are not groundless. It is certain
that at some point foreign investors will not want to increase further the
proportion of U.S. assets in their portfolios. That is the financing counterpart
to the payments deficit. At that point, the U.S. imbalance must narrow, with
the dollar likely having to decline in order to stimulate U.S. exports and
dampen U.S. imports. Moreover, sudden reversals of foreign investor sentiment
cannot be entirely ruled out, with the concomitant risk of rapid declines
in the dollar's foreign-exchange value. However, it is easy to exaggerate
the likelihood of a dollar collapse. Ongoing developments in the world economy
have enabled the scale of sustainable financial surpluses and deficits—
including those involving cross-border flows—to increase dramatically in
recent years without incident. As I point out in chapter 25, there are a lot of
imbalances, especially our potential federal deficit, to worry about in the
years ahead. I would place the U.S. current account far down the list.
*Nonfinancial debt includes the debt of households, businesses, and government but excludes
the debt of banks and other financial intermediaries.
347
THE AGE OF TURBULENCE
At the root of the concerns about the U.S. current account deficit is the
fact that by 2006, the financing of that deficit—that is, the inflow of money
from overseas—siphoned off more than three-fifths of all the cross-border
savings of the sixty-seven countries that ran current account surpluses in
that year.* Developing countries, which accounted for half of those surpluses,
were apparently unable to find sufficiently profitable investments at
home that overcame market and political risk. Americans a decade ago
likely could not have run up a nearly $800 billion annual current account
deficit for the simple reason that we could not have attracted the foreign
savings to finance it. In 1995, for example, cross-border savings were less
than $350 billion.
Analysts agree that it is often useful to think of a country's current account
balance in terms of its accounting equivalent: a country's domestic
savings (that is, savings within a country by households, businesses, and
governments) less its domestic investment (mainly productive capital assets
and homes).+ But there the agreement ends.
A country's current account balance and the difference between a country's
domestic saving and domestic expenditure on investment will by construction,
in a final accounting, always be equal.* Those who make decisions
to save, however, are not the same as those who make decisions to invest. In
fact, if we were to add up the total dollar amount of planned savings and the
amount of planned investment for any particular period, they would almost
never be equal. They come to equality only after plans are forced to change
as trade, income, and asset flows are wrenched into alignment by shifts in exchange
rates, prices, interest rates, and therefore levels of economic activity.
As with all such market reconciliations, the adjustments of all the variables
occur simultaneously. It is the equivalent of a solution to a set of simultaneous
equations. The world's checkbook must always balance.
The causes of the outsized U.S. current account deficit of recent years
are so interactive that it is difficult to disentangle them. For example, a rise
*Cross-border savings are the sum of the balances of those countries that have surpluses.
tin general, national income accounting establishes that the gap between domestic saving and
domestic investment is equivalent to net foreign saving; net foreign saving is a close approximation
of the current account balance.
tThere are some technical differences, but they are not important.
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CURRENT ACCOUNTS AND DEBT
in household saving, other things equal, would lower a country's current account
deficit. But other things are never equal. A rise in household saving
implies a fall in household spending—and perhaps, as a consequence, a decline
in corporate saving as profits decline. And the associated fall in revenues
from taxes on profits would lower government saving, and on and on. Since
all the components of saving and investment are intertwined, causal relationships
are obscure.
Most foreigners and many U.S. analysts point to the burgeoning U.S.
budget deficit as the primary cause of our current account imbalance. But
over the past decade the fiscal balance has at times veered in directions opposite
from the direction of the current account deficit. As our budget was
building surpluses between 1998 and 2001, for example, our current account
deficit continued to rise.
Some argue that the heavy purchases of U.S. Treasury obligations by
other countries' monetary authorities, first Japan and then China, to suppress
their exchange rates have elevated the dollar's foreign-exchange value
and thereby played a role in the huge increase in U.S. imports (from 13
percent of U.S. GDP in early 2002 to almost 18 percent in late 2006).
There is doubtless some truth in that, but the impact of official efforts to
manipulate exchange rates, in my experience, is often exaggerated.* Vastly
more significant is the U.S. dollar's status as the world's foremost reserve
currency, which has so far fostered the financing of our external deficit.
Many observers, however, consider this a vulnerability as well—foreign
*I have little doubt that China's monetary authorities' purchase of hundreds of billions of dollars
to suppress its exchange rate has been successful. The Chinese financial system is still sufficiently
primitive that market-generated offsets to those purchases are few. But apparently this
is not the case with Japan. There is little evidence that Japan's purchase of hundreds of billions
of dollars to suppress the yen has had much effect. Japan is part of a very sophisticated international
financial system that can absorb huge quantities of securities with only marginal effects
on interest rates and exchange rates. For example, billions of dollars of U.S. Treasury securities
can be swapped for equivalent sums in high-grade bonds for a modest cost in terms of basis
